SmoothSpan Blog

I had the pleasure recently of interviewing Rally Development’s CEO TIm Miller and CTO Ryan Martens.  I’ve mentioned Rally before as a company who I think does an exceptional job (particularly for a startup!) of leveraging the web.  In the wake of my recent Steve Singh interview, I wanted to continue to follow up on how SaaS companies are doing customer acquisition, and what they’re doing that really sets them apart from the crowd by using the web.

Give us a little background on  yourselves and on Rally Development

Ryan and I have worked together for 17 years and this is our third startup together.  Rally Development is a company focused on delivering a workflow product for Agile Programming.  Agile Programming is an engineering lifecycle process that is analogous to Lean Manufacturing.  We’re helping companies using traditional waterfall development to make the big step forward to modern Agile software development.  Companies today need to deliver in real time almost, and this is particularly true for SaaS companies.

We’re 110 employees, and we’re hiring 25 employees a quarter, so we’re aggressively expanding.  We’re at the tail end of closing another round of financing.  We have 375 customers and 15,000 users.  We’ve been growing 40% quarter over quarter for the last several quarters and expect to keep doing that into 2008.  Our largest customer has over 1000 seats.

Wow!  You guys are really growing. How did you manage that?

We modeled our company after Salesforce.com in every conceivable way.  The exception is we don’t have a Marc Benioff, but that’s appropriate.  We sell to engineers, not sales folks, so we need to be a bit quieter.

Like Salesforce, we’re multi-tenant from the ground up, we have nearly the same Average Selling price, same revenue per customer, same seats per customers, and we’re both workflow oriented products.  The difference is our product implements workflow for an engineering lifecycle–Agile Programming.

<At this point we talked a bit about Agile.  I shared that I have some background there since James Coplien wrote one of the papers that led to Scrum based on his study of my Quattro Pro team at Borland and how we were achieving enormous productivity.  For this interview, I wanted to keep going on the customer acquisition theme though, so that’s where we focused.>

Tell Us How You Go About Selling

Up until recently, we had a traditional inside sales model.  No outbound calling, very reactive to leads we created.  Over the last 3 years we’ve consistently reduced our cost per lead from well over $50 to about half that now.

We’ve been very successful selling to ISV’s, and started with almost all our customers being ISV’s in 2005.  In 2006 we started reaching large corporate IT departments, and such customers became about half our business in 2006.  By 2007, we were 2/3’s IT.  We haven’t gone head on into IT or changed our selling process yet, but we anticipate doing that soon.  This may increase our cost per lead given the publications IT read.

Over the last couple quarters we started getting out in the field more.  Unlike most companies, we’re not trying to turn an Enterprise sales force into a volume inside sales force.  We’re doing just the opposite.  A big deal for us is any deal with more than 50 seats.  Over the last 3 quarters we did 15 big deals, then 30 big deals, then 45 big deals.  Such deals require more face time, and we’re not shy about getting on an airplane to go visit someone.  We have both East and West coast sales people.  Eventually, we’ll get to Europe.

<At this point I mentioned how many SaaS companies I talk to are going through this evolution.  At one time, nobody wanted feet on the street.  Now companies are pushing hard up market and finding they need a real sales force.>

What are your thoughts on Sales 2.0?

You can’t just use feet on the street.  You need a volume business that lets you hit your number even if you don’t close any big deals.  You need both, and you have to feed them both.  Traditionally, half our business is big deals, but last quarter we didn’t do a single one and we still made our number.

When you sell to engineers, they don’t want to be hounded by a sales guy.  They want to download and try it and get educated, and then have sales come in and answer any remaining questions or help them scale and roll out Agility more broadly in their organizations.

<At this point, they made a passing mention of some “secret sauce”, so I had to follow up!>

What’s your secret sauce?

Agile is an open source methodology.  We can help scale lots of small teams onto 2-4 week cycles, ultimately distributed around the world.  We have users in 35 countries although we have only ever sold in 3 or 4 countries.  That’s the great story around SaaS–the reach it provides.  Worldwide, big deals, small deals, it all works for SaaS.  Selling to small customers scales to big customers because that’s how we grow incrementally and it’s how we make sure the product works for everyone.  That’s how we get to do the whole long tail.

Walk me through your customer acquisition and download model

We started with a single edition of the product, with demand generation driven lead acquisition, feeding those leads to volume reps, and now most recently we added a tier that feeds the leads to territory reps. 

We added a lower price point version than the core, called the Team version.  It worked okay, but wasn’t the right fit.  We needed a free version to take all the friction out of the initial acquisition.  So, we created the community edition, which is limited to one project.  Because SaaS lets us precisely target who uses our software, the free version didn’t have to be a bastard step child that was bad because you took out all the features and got something that didn’t work for anybody.  With SaaS, we can offer customers all the modules, but focus them to just a single development team, up to 10 seats.

That was a huge deal for us.  We launched last summer and it has been a rocket for growth and our sales organization then converts the free users to paying customers.

How do you talk customers into converting to the paid version?

We encourage customers to take as many community editions as they want.  In fact, we almost insist they start there and understand how Agile works for a single team.  As a result, we take all the selling barriers out and then we have upgrade incentives to convert.  We make it easy to migrate to the full-fledged product.

We know a customer is ready to convert when they have multiple community editions in use.  They get near their 10 user limit, and so then we call.  When they’ve already gotten a lot of use out of it and learned the value, they’re ready for a sales call.   A hard sell would be counter-productive, and it isn’t needed at that point anyway.

How do you guys do customer support?

Agile Commons is our support piece.  It’s a Web 2.0 community site providing expertise around Agility.  One of the top level menu items is Rally Community.  You don’t get to see a lot of that if you aren’t a customer.  Inside, we have things like an idea voting system similar to Salesforce’s IdeaStorm, we have dialogs with customers on features under development.  Customers get to see actual prototypes.  And, there is single sign on between our application and the Commons.

It’s been amazing the level of feedback we garner, the attention before shipping, and the way that gives us the ability to prepare and educate the installed base on what to expect from the next release.  We can instantaneously form beta groups this way and make customers a part of the product development team.

It builds trust, loyalty, and helps customers get what they need.  Customers can create their own topical areas and comment as well.  We’re about to let any member invite other members too.  Also, if you go through Agile University you get to join the Commons.  Many of the materials you need for University are found in the Commons.  Partners get to have sites in the Commons too.

<It’s clever to use community access as a way to drive upgrading to paid versions of the product.  What’s even more clever is the way they’ve tied together all of these ingredients to create virtuous cycles.  Customers help out with new version feedback, and beta testing, and in the process get educated so they’re better users of a product.  The University/education piece is tied in.  To get your “degree” in Agile programming, you have to learn to function in the community.  Lastly, letting members invite others to the exclusive club is very much along the lines of Social Networks.  I don’t remember seeing it done this well by a business before.>

That’s so creative, how did you guys come up with this?

We use HiveLive, another Colorado-based company, and that helped us grasp what was possible.  Their innovation was to remove all the admin problems with creating groups and permissions by empowering users to do that.  All the templates are configurable.  You take the IT resource out completely and push it to the users.

Once we saw that we were able to leverage that product.  We sell CommunityManager.  it takes the Hive Live platform, which is sort of a Ning/SocialText competitor, and we added on top of that all the templates needed to run the support org for a software company.  We added voting capabilities to that and built it into our Product Manager module.  PM’s love being able to access the voting feature.

It’s very powerful to integrate all these platforms.  Software is going from a linear product release business to a continuous flow service business.  Agile is the methodology that enables that.  SaaS is the delivery vehicle, and it is sold more as a continuous flow.  Community Manager brings this continuous process mentality to support.

Who else does this?

Salesforce has some of this in SuccessForce and IdeaForce.  We have a better community system, but theirs is a bigger community.  We’re in a completely different niche though.  We’re really tied to the operational flow and the product side of software driven organizations.  Salesforce is so CRM focused with little brand extensions off that core.  We work well with SFDC.  They’re a good partner more than a competitor.

Do you see this whole ecosystem as a way to do Viral Marketing for SaaS?

We sell ourselves as the experts in Agility.  We do that through content, white papers, webinars, and all those traditional pieces.  We push that first, rather than product, and that’s a key differentiator.  The content leads the product.  In fact, we give away the product for your first 10 seats.  We totally cannibalize that end of the market.

While we push being the experts, we dont’ charge for it.  But, when you retrieve our content, we get a warm lead and it builds our house list.

<This, I think, is their real secret sauce.  Content, and specifically being the experts at the best practices, sells the product.  Every company has the opportunity to be the experts with their own products, but how many really take the time to do so and give that expertise back?  What a powerful selling and community-building tool!>

How do you get good at producing content?

We’ve had since day 1 a services arm on our staff that produce this kind of content.  We have some of the world’s best Agile coaches, so we have a ton of content produced for keynote presentations or training.

But, even so, it was hard to keep the see rising.  To keep the sea rising around Agile is too much work for Rally alone.  So, creative commons open souced the content, we share it, and we let others use it for their own businesses so long as they don’t compete with us.

Now many people are incented to help create and disseminate content around Agile programming in our community.

<And here is the other half of the secret sauce.  Using open source for content gives them tremendous leverage over having to create all the content themselves.  Plus, it aligns a bigger ecosystem around their product offering.>

What else should we talk about this interview?

We’re going through the Geoffrey Moore lifecycle process  with our first product.  Now we’re starting to look at the platform space.  Not a wide horizontal SaaS platform, but one that our customers can develop on and mash up.  We’re not ready to announce anything, but we’ll be in touch!

<Despite a radically different scale of company and a totally different market they are very much on track with what Concur’s Steve Singh said about his public software company’s approach to customer acquisition.  Lots of interesting lessons to take away from these guys:

– You can use the web to take a prospect all the way to highly qualified status where there is little question they’re ready to buy.  It takes a free version of the product to get started with, a community, and a best practices university offering content.

– High value content is the starting point.  Some of it you have to develop.  Once you get a critical mass, a community and open source can help you crowdsource content for your company or cause.

– There are a number of virtuous connections and feedback loops between product, community, content, marketing and sales.  Make sure you’ve got them all wired together to emphasize this!

– Lots of ways to incent desirable behaviour, but they key here is incentive.  Rally uses exclusivity (only paying customers get full community access), free valuable content, referrals, partner incentives (you can use our content and you can plug into our community), and I would bet a variety of other incentives.>